Financial institutions can provide customers/investors with a wide range of services, but it is frequently the case that one financial institution does not adequately meet all the requirements of a customer/investor. One type of financial institution is a broker dealer. As is known in the art, a broker dealer financial institution holds customer financial accounts and operates to execute transactions such as the buying and selling of securities on behalf of customers. FIG. 1 shows a prior system 100 for a broker dealer. A broker dealer can establish investor accounts for its customers. These customers/investors, sometimes referred to as retail investors, who have relationships directly with the broker dealer and have not enlisted the services of financial advisor to manage their investor account. These customers are shown in FIG. 1 as investors 1, 2, . . . , N. Data pertaining to these retail investor financial accounts 104 is stored in a data storage system 102. FIG. 5 shows an overview of relationships relating to a broker dealer 502. Each of the investors 504 enters into an investor broker dealer agreement 506 with the broker dealer 502 which specifies aspects of the relationship between the investor and the broker dealer. As shown in FIG. 1, investors can communicate with the broker dealer via an internet 120 connection, or other suitable communication network, to a communication port 110 of the broker dealer system 100. The investor can also directly contact representatives of the broker dealer, either in person or via telephone. The investors have financial accounts 508 holding a variety of financial assets which are custodied with the broker dealer. Assets held in the accounts can include stocks, bonds, mutual funds, bond funds and money market funds. In response to investor instructions the broker dealer executes transactions 510, such as the buying selling of assets with others in the financial markets 512.
In some cases the broker dealers employ stockbrokers that provide specific financial advice to investors, such as recommending that an investor customer buy or sell a specific security. In other cases the broker dealers operate to provide customers with general information regarding investments, such as recommending general asset allocation strategies, or other investment strategies. In some cases broker dealers do not provide a high degree of direct interaction between an individual stockbrokers and individual clients, and do not provide specific recommendations, such as buy Stock A and sell stock B. The investor/broker dealer agreement 506 specifies fees that are charged to the investor for different services provided to the investor 504 by the broker dealer 502.
In some cases, an investor will take a different approach and work directly with an independent financial advisor 112. The advisor 112 takes on responsibility for managing the assets held in its client's account 514. In these situations the client of the advisor 516 relies on the advisor's services to implement investment strategies and wealth management approaches that fit the client's needs. In these cases, the broker dealer 502 will typically provide very little direct advice to the client of the advisor 516 with respect to the client of the advisor account 514 which is managed by the advisor 112. In these situations, the broker dealer 502 will act primarily as a custodian to hold the client of the advisor financial accounts 514 and the assets therein, and to execute the transactions as directed by the financial advisor 112. The clients of the advisor 516 (in FIG. 5) are shown in FIG. 1 as client A, B, . . . Z of advisor. Where a client employs the services of an advisor 112, the advisor and the client of the advisor 516 enter into an Advisor/client agreement 518, which specifies aspects of the advisor-client relationship. Typically an Advisor/Client agreement 518 provides for an asset management fee, where the management fee is percentage of the total assets managed by the advisor. Usually this amount is about 1% of the total assets, and can vary up or down depending on the total value of the assets managed by the advisor. In some cases, the advisor may charge additional fees for additional services such as financial planning, estate planning, and tax preparation. These additional fees can be considered part of the asset management fee or can be treated separately.
Advisors 112 who have client of advisor accounts 514 custodied with the broker dealer 100 enter into an advisor/broker dealer agreement 520 which specifies aspects of the relationship between the advisor 112 and the broker dealer 502. This agreement specifies fees which the broker dealer will charge the advisor for services provided by the broker dealer. The client of the advisor will also enter into an agreement 522 with the broker dealer regarding their relationship with the broker dealer 502. The broker dealer system 100 stores data for all of the clients of the advisor whose accounts 514 are custodied with the broker dealer. The client of the advisor account data 106 stored in the database system 102 of the broker dealer system 100 contains, among other data, information identifying the specific advisor associated with each client of the advisor account 514, and information identifying the assets held in each client of the advisor account.
During the normal course of business, broker dealers frequently identify retail investors who are interested in forming a relationship with an independent financial advisor 112. Frequently, such investors will seek guidance from the broker dealer in connection with their interest in retaining the services of a financial advisor 112. In such situations, the broker dealer 502 may want to refer such an investor to an advisor 112 that they have worked with in the past, and found to be reputable and effective independent financial advisors.
Charles Schwab & Co., Inc. (Schwab), which is a broker dealer, and the assignee of the invention herein has previously developed and implemented programs for referring qualified investors seeking the services of an advisor. One recent program implemented by Schwab is the AdvisorSource® program, which has been widely publicized and utilized by both customers and advisors. The AdvisorSource® program requires that the independent financial advisor pay a fee to the broker dealer for referrals of investors interested in retaining the services of a financial advisor. The referral fee paid under the AdvisorSource® program is based on the number of broker dealer branch offices which will refer customers to the financial advisor.
For example, a financial advisor would pay a set referral fee to receive referrals from a particular branch office of the broker dealer. As a result of the referral fees, referrals would be made from the particular branch office for a specified period of time. Whether or not referred investors engage the services of the financial advisor the referral fee would remain in effect, and it is not dependent on the number of investors, or the amount of the investor assets, which the financial advisor ends up managing as a result of the referrals. Under the AdvisorSource® program, the referral fee is a one-time fee paid by the financial advisor to the broker dealer, for a set period of time. This fee is one-time in that the advisor pays for referrals for a specified period of time, and the advisor has the option of paying an additional set fee after the prescribed period of time to receive additional referrals for an additional specified period of time. If the advisor opts to not pay for additional referrals, then the advisor will pay no additional money to the broker dealer under the referral program, and will not receive further referrals. Thus, for clients which the advisor has previously secured as a result of past referrals, there will be no additional referral fees due to the broker dealer.
In an earlier referral program implemented by Schwab the financial advisor would pay fees to the broker dealer based on the value of investor assets which were brought under the financial advisor's management as a result of a referral. This previous referral program provided that the amount the referral fee would decrease each year for a referred account, and after the third year of management by the financial advisor no additional referral fees would be due to the broker dealer. Specifically, this prior referral program provided that the advisor would make payments pay to the referring broker dealer as follows: thirty percent (30%) of the first year of advisory fees owed by the client to the advisor; twenty-five percent (25%) of the second year of advisory fees owed by the client to advisor; twenty percent (20%) of the third year of advisory fees owed by the client to advisor. According to this previous referral program the advisor was required to pay the broker at the time the client was required to pay the advisor. The process for implementing the payment of the referral fee was manually intensive. At the end of the quarter the broker dealer would prepare a form for the advisor identifying all of the referred accounts. This form was sent to the advisor, and the advisor would fill out the form and send it back to the referring broker dealer indicating the asset management fee for each referred account. The broker dealer would then generate an invoice for each advisor based on the above formula, and send the invoice to the advisor.
When an investor is referred to an advisor, and the investor and advisor enter into an advisor/client agreement, the investor account will be treated by the processor system 108 of the broker dealer system 100 as a client of the advisor account from that point forward. In the context of FIG. 1, this means that the customer account will now be moved to a client of the advisor account area 106 of the data storage system 102.
In some cases, the AdvisorSource® referral arrangement has been perceived as not aligning the interests of broker dealer with the interest of the financial advisor as directly as possible. For example, the broker dealer, derives revenue for making referrals regardless of whether or not the financial advisor is able to form a relationship with referred investors. Further, even under Schwab's referral program prior to AdvisorSource®, the broker dealer would receive large front-end loaded referral payments based on the advisor's asset management fees, but after three years, no further fees would be due to the broker dealer. Thus, the broker dealer would be in a position of having received a relatively large percentage of the early asset management fees generated by the financial advisor, even in the situation where the financial advisor was not successful in retaining the clients asset management business for the long-term. The prior referral programs introduced other limitations and concerns which are addressed by invention disclosed herein.